When Ford borrowed a €750m bond in euros at the start of the year, the US carmaker was following a path that has become familiar to corporate America.
The deal was an example of so-called “reverse Yankee” issuance, where US companies sell bonds in euros, tapping demand from eurozone investors.
Ford added to the more than €100bn of debt sold in the eurozone over the past two years by US companies, which had been lured as the European Central Bank’s bond-buying programme drove borrowing costs to record lows.
Donald Trump’s capture of the White House in November is complicating the picture. The prospect of faster domestic growth has compressed the premium investment grade that companies must pay to issue bonds in dollars, pushing the cost of borrowing for corporates in the US, measured as a spread over the risk-free rate, below the European rate. Since Ford, just two other US borrowers have tapped European markets.
The premium that money managers demanded to hold investment grade US corporate dollar bonds has slid to 119 basis points over the benchmark sovereign debt, compared to 122 basis points for European investment grade companies.
1. European Central Bank president Mario Draghi says he will do whatever it takes to preserve the euro
2. The US Federal Reserve announces it will begin tapering QE purchases
3. ECB starts QE, €60bn a month of purchases
4. Massive sell-off in European banks and low rates environment sparks concern
5. Donald Trump wins US presidential election
“One of the reasons you are seeing less activity is that spreads in the US are more attractive generally for issuers than they are in Europe,” says Andrew Karp, co-head of global investment grade capital markets at Bank of America Merrill Lynch.
However, with financial markets hungrily awaiting details of the corporate tax changes Mr Trump has promised, some investors believe the new administration may yet reignite the “reverse Yankee” trend.
Their focus is on the president’s proposal to eliminate companies’ ability to deduct interest payments from taxable profits, which has been an incentive for corporate America to issue debt in dollars.
“If a change to interest deductibility in the US were to happen, then all of a sudden European issuance is going to look pretty interesting if it means preserving the tax shield here,” says Henrik Johnsson, co-head of global debt capital markets at Deutsche Bank.
Should Mr Trump’s administration, alongside a Republican-controlled Congress, pursue the interest loophole for companies it will further complicate the delicate task for chief financial officers and treasurers of US multinationals in choosing between different geographies and currencies to exploit marginal differences in rates.
At the same time, it will also present challenges and opportunities for investors desperate to pick up extra yield where they can find it.
Fraser Lundie, co-head of credit at Hermes Investment Management, highlights, for example, that some of the “mispricing” between bonds sold in euros and dollars by US companies is only down to the lack of familiarity European investors have with the issuers.
He points to Huntsman, a Texas-based chemicals company, that has bonds in both euros and dollars maturing in 2021. The US bond is trading at a spread of 196 basis points, compared to 288 basis points for the euro bond. The cost of cross-currency swaps accounts for 56 basis points, leaving a 36 basis point premium for money managers who buy the euro-denominated debt.
“It’s an opportunity,” argues Mr Lundie. “There really is no reason other than unfamiliarity for those 36 basis points.”
And Hermes echoes Mr Johnsson of Deutsche Bank that any elimination of the deductibility of interest payments would further change the picture for the European corporate bond market. “American firms would be incentivised to issue bonds offshore in much the same way that many currently try to book profits overseas, in order to minimise the tax burden on their onshore profits,” the investment firm noted.
The burst of reverse Yankee issuance over the past two years has helped swell the size of the European corporate bond market, a fillip to a currency union that will be tested by key elections in the region this year.
On Tuesday, both investors and issuers in the market will tune into Mr Trump’s State of the Union address for any clues on what the administration’s priorities on corporate tax will be.
“It’s going to go backwards and forwards,” Mr Lundie of Hermes says of issuance in the US and European markets.
Mr Trump, who has voiced his own scepticism of the EU, could yet give the European corporate bond market a helping hand.
